The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has held that the Principal Portion of the loan amount waived by lender credited to Profit & Loss account is not liable to tax.
Tikona Trust, the assessee trust is a “private trust” and had filed a return of income on 31st August 2018 showing income from business and profession at Rs.1,17,04,178/-. Since the assessee had brought forward losses of the earlier years, it claimed to set off the losses of earlier years against the current year’s income and the gross total income of the assessee was claimed to be Rs. Nil.
The AO/CPC noticed that the returns of income of the earlier years have been filed beyond the time prescribed under section 139(1) of the Income Tax Act, 1961. The CPC took the due date for filing the return of income by the assessee as 31st July as per clause (c)of Explanation 2 to sec. 139(1) of the Act. The due date of 31st July was extended by the Central Government in some years by notification due to certain unavoidable circumstances.
It was submitted that the assessee had taken a loan in an earlier year and the said loan consisting of both principal amount and interest amount has been waived off. Further the amount of principal portion of the loan amounting to Rs.2,00,18,970/- has also been credited to the Profit and loss account and it was also offered to tax in the return of income.
It was contended that the principal portion has not been claimed as expenditure and hence the waived amount of principal is not taxable u/s 41(1) of the Income Tax Act.
It was observed that the assessee has credited the P & L account with the waiver of the interest portion and waiver of the principal portion of the loan. A perusal of the computation of total income would show that the assessee has not excluded the principal portion of the loan waived from the Net profit shown in the Profit and Loss account.
It was submitted that the assessee had taken a loan in the earlier years from a group concern named M/s Tikona Digital networks P Ltd and the loan proceeds were utilized for purchasing shares. Hence the loan was not a working capital loan. In the case of term loans, the principal portion of the loan is not allowed as a deduction while computing total income and the provisions of sec. 41(1) are not attracted in case of waiver of the principal portion of the loan.
Section 41 (1) of the Income Tax Act particularly deals with the remission of trading liability. Whereas in the instant case, waiver of loan amounts to the cessation of liability other than trading liability. Hence, we find no force in the argument of the Revenue that the case of the Respondent would fall under Section 41 (1) of the Income Tax Act.
A Coram comprising of Shri Baskaran B R, AM and Shri Aby T Varkey, JM held that the principal portion of the amount waived by the lender amounting to Rs.2,00,18,970/- credited to the Profit and Loss account is not liable to taxation under the Income-tax Act. Further while allowing the appeal, the assessing officer was directed to exclude the amount while computing the total income of the assessee.
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